The Prepared Mind: October 13, 2014

It was a wild week for the markets. Wednesday was the biggest up day of the year for the Dow Jones Industrial Average – up 275, while Thursday was the biggest down day of the year – down 335.The major indexes fell to 8-week lows with fears fueled by slowing global (specifically European) growth, the specter of deflation, An Ebola pandemic, turmoil in the Mideast, and the end of the Fed’s quantitative easing. Equity indexes were down 3% for the week and drown 5% from recent all-time highs. The current move downwards is halfway to the 10% move used to define a market correction.

Remain calm and have a plan. After the crash of 1987, famed financier John Templeton said one of his foundations for success was never having bought a bottom nor sold a top. Bernard Baruch said the same thing with a different twist: “Don’t try to buy at the bottom and sell at the top. It can’t be done except by liars.” This adage is a good description of what it means to let a market come to you. Uncertainty increases the value of judicial use of the strategy – “Do nothing.”

Here is an overview of last week’s market performance:

Index

Oct 10 Close

Weekly Change

% Weekly

% YTD

Volatility of Index

Dow Jones Industrials (DJIA)

16,544.10

-465.29

-2.74%

-0.20%

17.11%(VXD)

S&P 500 (SPX)

1,906.13

-61.77

-3.14%

3.13%

21.21% (VIX)

NASDAQ 100 (NDX)

3,858.36

-165.43

-4.11%

7.42%

22.62% (VXN)

Russell 2000 (RUT)

1,051.58

-50.80

-4.61%

-9.63%

24.35% (RVX)

S&P 100 (OEX)

853.36

-25.41

-2.89%

3.59%

20.2% (VXO)

CBOE Volatility Index (VIX)

21.21

6.66

45.77%

NA

A reminder: On Monday, October 6, the CBOE is changed the methodology use to calculate the VIX. In addition, the CBOE has added trading in weekly options on the VIX. The VIX you see on the board under the symbol “VIX” will include the qualifying monthly and weekly SPX options. The VIX value used to settle VIX futures and options will only include monthly SPX options, same as before. Except that VIX will now use the symbol “VIXMO.” Add, track and compare the two measurements to gain a real life understanding.

The weekly gain for the VIX was the seventh highest since 1990. The absence of what had become expected buy programs for the equities fueled a 46% gain in the VIX and a 58% gain in VXST – the VIX Short-term Volatility Index.

VIX curves went from contango from backwardization. The front month future is now trading higher than the back month VIX futures. This change can bee seen in the chart below. Compare last week’s VIX futures settlements with this week’s settlements.

Here is an overview of last week for the VIX and related products:

Index

Ticker

10/10 Close

Change

% Change

10/3 Close

CBOE Volatility Index

VIX

21.24

6.69

45.98%

14.55

VIX October Future

VXV4

19.78

4.58

30.13%

15.20

VIX November Future

VXX4

18.65

2.85

18.04%

15.80

VIX December Future

VXZ4

18.44

2.29

14.18%

16.15

CBOE Short-term Volatility Index

VXST

21.95

8.09

58.37%

13.86

CBOE 3 Month Volatility Index

VXV

19.93

3.89

24.25%

16.04

CBOE Mid-term Volatility Index

VXMT

20.56

2.92

16.55%

17.64

VIX of VIX

VVIX

113.38

25.61

29.18%

87.77

Long VIX ETP’s

S&P 500 VIX Short Term Futures ETN

VXX

35.85

6.23

21.03%

29.62

S&P 500 VIX Mid-Tem Futures ETN

VXZ

13.87

1.08

8.44%

12.79

Short VIX ETP’s

Daily Inverse VIX Short Term ETN

XIV

31.86

(8.12)

-20.31%

39.98

Short VIX Short Term Futures ETF

SVXY

62.46

(15.96)

-20.35%

78.42

The domestic economic focus this week will be on the consumer sector and housing. Wednesday’s Retail Sales report is expected to confirm positive reports on consumer behavior in September. Recent reports for housing have shown slippage in sales and prices. Homebuilders are the largest contributor to housing starts Thursday’s report on Housing Starts is an indicator of builders’ perception of the strength of the housing market. International economic reports will carry greater weight then US reports. China will be releasing CPI, PPI and merchandise trade data. Eurozone reports will focus on consumer and producer prices. These numbers will be parsed for any evidence of deflation.

Market focus may be changing from global concerns to earnings. The 3rd Quarter earnings season has started. The earnings will have the ability to trump global concerns. The announcements will start coming out in full force at the end of this week. Equity traders need to know if earnings fall before or after the expiration date of any options traded. I have scanned for stocks announcing earnings the coming week using the following criteria: Price > 20, 30 Day Implied Volatility > 22, and Average Daily Option Volume > 400 contracts. It is your responsibility to confirm these earnings dates. Earnings dates can and do change.

Trading advice to remember:

“Chance favors the Prepared Mind.” – Louis Pasteur

“Don’t try to buy at the bottom and sell at the top. It can’t be done except by liars.” Bernard BaruchMonday October 13:

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